When a Plan seeks reimbursement from a beneficiary under ERISA Section 503(a)(3) (“appropriate equitable relief”) for medical expenses the Plan paid, can the beneficiary assert equitable defenses?

The Circuits are split on this.  A new case, applying recent United States Supreme Court precedent, concludes the beneficiary can assert equitable defenses.

This new case highlights the issue.  US Airways, Inc. Plan v. McCutchen [PDF], __F.3d__ (3rd Cir. 11/16/2011)(beneficiary may assert equitable defenses to reduce reimbursement amount sought by ERISA Plan).

FACTS: McCutchen was injured in an auto accident. The US Airways ERISA Plan paid $66,866 in medical expenses.  McCutchen then obtained a personal injury settlement for $110,000.  After paying his attorneys, McCutchen netted $66,000. The Plan sought reimbursement, asserting a claim under ERISA Section 502(a)(3), seeking “appropriate equitable relief” in the form of a constructive trust. The Plan terms also required reimbursement from “any monies recovered” from a third party.

TRIAL COURT: Summary Judgment GRANTED for PLAN, requiring McCutchen to reimburse Plan $66,866.

APPEAL ISSUE: Whether Section 503(a)(3)’s requirement that equitable relief be “appropriate” limits the Plan’s recovery from a beneficiary by equitable defenses “typically available in equity.”

THIRD CIRCUIT:  REVERSES— EQUITABLE DEFENSES MAY REDUCE PLAN RECOVERY.

RATIONALE:

1. “Appropriate equitable relief” under ERISA 502(a)(3) means “something less than all equitable relief.”  Congress intended to limit equitable relief available under this section through the application of equitable defenses.  Op. at 11. (Emph. in original).
2. Equitable liens by agreement are not subject to the asset tracing requirements imposed on liens sought as a matter of equitable restitution.  Op. at 9.
3. Equitable relief must mean “something less that all relief.”  Op. at 10.
4. “Unjust enrichment” is applicable to claims for equitable relief.  Op. at 12.  The Court rejects the Plan’s argument that equitable doctrines limiting reimbursement recovery are inapplicable.  Op. at 14-15.
5. The Court rejects decisions from other circuits (8th and 11th Circuits) that have held “that it would be pioneering federal common law to apply equitable limitations on an equitable claim.”  Op. at 15.
6. Applying the doctrine of unjust enrichment, McCutchen prevails because the net amount of his recovery from the third party is less than full payment of his medical bills, “thereby undermining the purpose of the Plan.”  Op. at 17.